3 Reasons to be Bullish on U.S. Manufacturing

When you’re surrounded on all sides by a service economy, it can be easy to forget that stuff still actually needs to be built. Most of us rarely, if ever, deal with the actual manufacture of goods.

According to the Bureau of Labor Statistics, the service providing sector accounted for 79.9% of total employment in 2012, and the share is expected to edge up to 80.9% by 2022. Meanwhile, goods producing sectors (excluding agriculture) liked mining, construction, and manufacturing accounted for just 12.6% of total employment, and the share is expected to fall to 12.1 percent by 2022. Manufacturing itself (separated from mining and construction in the BLS data) employs just 8.2% of the total, and the share is expected to fall to 7.1% in 2022.

The “decline of U.S. manufacturing” captured by this data didn’t so much catch people off guard as it simply rolled through the economy like a cannonball. The evaporation of demand caused by lower-cost competition from emerging industrial countries was unavoidable, and in a sense many jobs were simply exported. Total employment in manufacturing peaked near 20 million in 1979, about 22% of total employment at the time, according to the BLS. Since then, manufacturing employment has fallen to about 12.1 million.

But despite the dramatic decline in employment, total real manufacturing output has nearly recovered to its pre-crisis peak. Real manufacturing output per hour is up more than 13% since the pre-crisis peak and measures of manufacturing activity show accelerated growth across most major components of the sector. This suggests that the blow to U.S. manufacturing was real, but far from fatal. In fact, the blow may have ultimately made the sector stronger. Many of the companies that survived (and the few that thrived) are leaner, savvier, and more innovative relative to the rest of the world than they were 10 or 15 years ago.

Here are a couple of reasons why things are looking up for U.S. manufacturing.

Source: Thinkstock

1. Advanced technology

One of the great things about right now is that it’s rapidly becoming the future many of us dreamed about. A century or so of economic growth and some good luck have given us cars, a small pox vaccine, and the Internet. Hell, a few more years and we might be scooting around in self-driving cars on solar freaking roadways and whimsically recalling the days before Internet access was broadcast via satellite to the entire world.

But alongside — or perhaps more accurately, within and beneath — the advancement of infrastructure, transportation, and information technology are foundational innovations in manufacturing. In an interview published to the McKinsey insights page, Katy George, a director at the management consulting firm, described these innovations as “more exciting and potentially more disruptive than anything we’ve seen in a long time.”

In the interview (video below), George outlines some relevant technologies. “These include advanced robotics, which create much more flexibility in the way automation can work in a factory than in the past. This also includes digitized manufacturing, where plant managers can monitor machines on their iPhones and make real-time decisions about how to optimize production in a factory, as well as to do much more predictive maintenance work around their assets — and going beyond managing a factory that way, to manage a whole global network of factories and suppliers with this kind of real-time information.”

Add to this mix 3D printing, which Dartmouth Professor Richard D’Aveni argues will change not just how the manufacturing game is played, but where. “As 3-D printing takes hold, the factors that have made China the workshop of the world will lose much of their force,” D’Aveni wrote for the Harvard Business Review in March 2013. “China has grabbed outsourced-manufacturing contracts from every mature economy by pushing the mass-manufacturing model to its limit,” but “under a model of widely distributed, highly flexible, small-scale manufacturing, these daunting advantages become liabilities.”

Source: Thinkstock

2. Advanced thinking

“Advanced thinking” may sound like the name of a fictional 200-level class at a liberal arts college, but we’re going to use it to describe a change in the attitude of both business leaders and consumers toward economy, society, and environment over the past few decades.

McKinsey’s Katy George touched on this idea in the interview posted to the last page (which we recommend, if you skipped it), and Dartmouth’s Richard D’Aveni more directly invoked the idea in his article on 3D printing. It’s not just stuff that’s changing, it’s how we think about stuff — it’s how we think about the relationship between suppliers, producers, and consumers of stuff, and how that stuff is supplied, produced, and consumed. To put some punctuation on a nebulous idea: people have started giving a crap, they have started thinking long-term, and they have started thinking local.

These relationships describe an ecosystem that spans economy, society, and environment, and evidence of change in this ecosystem is increasingly abundant. George’s anecdote about the manufacturer that moved from Mexico to the U.S. in order to be closer to 3D printing technology is just one, but it’s illustrative. D’Aveni takes the point home, arguing that, “No workforce can be paid little enough to make up for the cost of shipping across oceans.” As George says, “It will be important for companies not only to think about where they locate their plants, but also how they invest in their ecosystems: developing their supply base, helping their supply base think about the right locations, helping to invest in new-technology adoption, as well as thinking about worker training.”

Source: Thinkstock

3. Just follow the data

If you ask the data, they are nearly all in agreement: manufacturing activity in the U.S. is on the rise.

One way to measure this rise is to look at a purchasing manager’s index (PMI.) The PMI derives its value from a survey of private industry executives. These executives are polled for information about the state of the industry, and breaks that information into five equally weighted categories: new orders, production, employment, supplier deliveries, and inventories. The data are typically seasonally adjusted, and are used to calculate component indexes reflecting the various categories, as well as a composite index reflecting the overall industry.

The PMI maintained by the Institute for Supply Management (ISM), which helped develop the indicator, increased from 56.6 to 59.0 in October, indicating accelerated growth in manufacturing — and therefore, depending on who you ask, the overall economy. October marked the 17th consecutive month that the headline index showed growth. A separate PMI maintained by Markit, a financial services and research firm, showed decelerated growth.

“October’s survey highlights that the revival in U.S. manufacturing conditions remains on track.Production levels expanded at an impressive rate by international standards and overall momentum is still stronger than the post-recession trend.” Markit Chief Economist Chris Williamson commented with the October report. “However, the latest figures indicate that the recovery has lost some intensity at the start of the fourth quarter, reflecting subdued export demand from the euro area and key emerging markets.”

Another way to measure this rise is to simply measure the dollar value of new orders for manufactured durable goods. This data, collected by the Department of Commerce and the Census Bureau, show that the value of new orders has recovered to its pre-crisis peak. More orders means more business, which is a positive sign not just for the manufacturing industry but suggests that the rest of the economy (those with the demand) are recovering.